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I can’t believe I forgot yet another Tax Freedom Day. I am so busy this time of year. I didn’t even get my Happy Tax Freedom Day cards out into the mail until last night. What an embarrassment.
But yes, Tax Freedom Day was last week, June 14th to be exact. Virtually every Canadian added some extra cash to their pay cheque as of June 14th and to be honest, it could not have come at a better time. It costs $100.00 to fill my car each week and the price of food (based on the price of corn) continues to climb along side.
I think Tax Freedom Day will always be a bit of a second-rate holiday for people like me. While it is an important day for most Canadians, it holds little importance for HSA owners. After all, they already enjoy a greater degree of tax freedom when it comes to their medical expenses. When an individual business owner experiences savings of $5,000-$10,000 a year for their high-cost medical expenses through an HSA, you can understand why Tax Freedom Day is a bit over-rated. After all, an additional $150.00 in their pocket from mid-June to December isn’t going to change the world. They have turned Tax Freedom Day into a year-long event. Sort of like those neighbors who leave their Christmas lights up all year long…because they can’t get enough of the holidays I suppose.
But I am always looking for a reason to celebrate and even though I missed the official date, I still have 30 people coming over on Saturday for a Tax Freedom Day BBQ. You know, the kind where you drink lower-taxed domestic beer versus imports and play games like “pin the tail on the finance minister”. That reminds me, I need to order my dollar-shaped cake for the party!
Recent studies by Statistics Canada indicate that more than 1.7 million Canadians ages 45 to 64 provide care to approximately 2.3 million seniors with long-term disabilities or physical limitations. Seven out of 10 of these caregivers are employed full-time. With baby-boomers being forced to balance the needs of their elderly parents and their careers, the outflow of skilled workers into early retirement to focus on their families may speed up the looming labour crunch. While most HR professionals are focused on the approaching mass retirement of baby-boomers across Canada, eldercare responsibilities are proving to be a burden for the employee and an opportunity for the employer.
An opportunity for employers? Did he say that correctly? Yes, in fact. Providing care services for a parent can be an immense financial burden for employees. While some can pay for basic care services, many opt to manage the care themselves due to the overwhelming costs. The opportunity for the employer is that the introduction of a Health and Welfare Trust to the benefits program could help to relieve this burden for the employee. The result is a reduction in stress amongst employees with elderly parents and a desire to stay with their current employer long-term, perhaps well into their expected retirement years.
The Health and Welfare Trust provides the employee with pre-tax dollars to use towards health care costs. Since Canada Revenue Agency (CRA) allows a dependent to be an elderly parent, as long as they are financially reliant on the employee, the costs associated with their care is considered an eligible expense. This means that the HWT can actually serve as a formal financing vehicle for the employee’s elder care needs. As an employer, you can choose to provide the HWT as a top-up to the existing benefit plan, as an alternative matching for a DC pension plan, or even through a salary amendment agreement with the employees. The key benefit for the employee is that the original costs paid with after-tax dollars can now be paid using pre-tax dollars. In some cases this amount can be a substantial financial benefit for the employee.
As an employer you stand to benefit, as your baby-boomer employees opt to stay longer knowing they have access to a financial vehicle to care for their parents. You also have the opportunity to establish yourselves as an employer of choice within your industry by offering an innovative employee-focused benefits solution.
I am a bit of a looser when it comes to taxes and I am probably the first Canadian to submit their return each year. I always get a reimbursement cheque and immediately put it back into my investment portfolio. For self-employed Canadians however, there is a better option!
A smart place to put your tax reimbursement is always a Health Care Spending Account (HCSA or HSA). But what should you think about before putting your money into one? Well, if you own your own business that is not incorporated, you may want to consider opening a Private Health Services Plan (PHSP) this year. If you do, you should take a few steps to consider if this is a good option for you…
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Do a headcount of your family members. To determine your maximum PHSP allowance each year, you simply add $1,500 for each eligible adult over the age of 18 years and $750 per dependent under 18 years old. If it is you, your spouse, and your son, then you are entitled to $3,750.00.
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Top-up or Not? Take a look at your finances (high-level) and get a sense of how much money you will be getting back from your return. If you have a financial planner or broker, speak with them about topping up your RRSP contributions. They will have access to several calculators to help you determine how much your return could be if you “maximized it”. You may want to top-up to get the reimbursement to equal your PHSP allowance.
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Take a look at your family and business finances and decide if you can go a year without the reimbursement. Some families rely on their tax reimbursement each year, so deciding not to take it can be a bit of an issue. If you can live without the money and put off that trip to Disney World with the kids for the coming year, why not make it work for you next year?
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Be sure to send in your return to Canada Revenue Agency sooner than later. Why? The earlier you receive your reimbursement, the better off you are for next year’s deductions with your PHSP. The deduction for the PHSP is pro-rated, so you will want to start your contributions early in the year to get the full benefit. The faster you get your money back, the faster you can open your account. But remember, you can always simply open the account and fund it yourself until you get reimbursed – but why use your own money?
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Finally, determine the final deposit amount for your PHSP. This is done by calculating the difference between your maximum PHSP allowance (less pro-rated months if you are not early) and your return reimbursement. If you are getting more back from CRA versus your PHSP allowance, congratulations! If not, you need to look at how much your family needs for healthcare and whether or not you want to top it up with your own money. Remember, what you put into your PHSP is a full deduction for you (unlike RRSPs), so you may want to go the extra mile here.
Well, that just about covers it. If you do decide to use your tax return to fund a PHSP, remember that the strategy here is to use the funds to pay for your healthcare costs while making a sensible tax move. The money you deposit in the coming months will be 100% deductible off your 2008 return as a business expense. If you think about the same money going into an RRSP, you would never receive the full amount as a tax deduction. If you are going to be making regular RRSP contributions throughout 2008, why use your 2007 reimbursement to get a small lift when you could get a full lift from a PHSP?
Every few weeks, I am showcasing a different advantage of owning a Health Spending Account in this segment called…
HSA Advantage….
Many readers would argue that this is the number one benefit of having a Health Spending Account. Others will say it is the tax-savings. Personally, I would agree with the Flexible Spending crowd on this one.
In case you did not know, Health Spending Accounts cover a wide range of services and procedures – far more than any insurance plan on the market today. While an HSA is technically an insurance plan in the eyes of Canada Revenue Agency (CRA), it follows a claiming schedule designed for tax deduction purposes as opposed to caps or maximums based on general insurance risk and claiming patterns. To clarify, think of your traditional health insurance plan from Manulife or Sun Life. The plan has maximums for things like prescription drugs, massage therapy visits, and private duty nursing. These caps or maximums are tied to the premium you pay. The lower the maximum or allowance for each item, the lower the premium you pay – similar to the deductible on your car insurance and the price you pay in premiums.
A Health Spending Account on the other hand has no plan design and the items you can claim for reimbursement are at the discretion of the owner – as long as you have sufficient funds in the account and the claim is considered eligible by CRA. The rules for claiming come from Canada Revenue Agency’s interpretation bulletin IT-519R2 Medical Expense and Disability Tax Credits and Attendant Care Expense Deduction. In addition to covering the basic items (drugs, therapy, dental, etc..) the funds can also be used to pay for many of the items insurance plans refuse to cover – such as smoking cessation, fertility drugs, elective surgery, cosmetic surgery, special needs schooling and more…
The key advantage is that you dictate the amount you want to spend and what you want to cover, not your insurance provider. If you or your employer decide to deposit $1,200 into your Private Health Services Plan (PHSP) or Health and Welfare Trust (HWT), you can spend it all on one service (such as massage therapy) or on a variety of services for you and your family. The flexibility of the HSA means that you have complete control over what you spend and when you spend it – a true advantage. For more information on claiming, feel free to view our making claims information page here at HSACanada.com.
In recent years, I have seen a growing number of Health Spending Account solutions appear in the market. Some are great and I applaud those providers who have done their research and developed a product that is respectful of the interpretation bulletins published by Canada Revenue Agency (CRA). However, a growing number of companies have entered the market in recent years looking to make a quick buck without truly investing in their knowledge of the product. To help, I thought I would start a new blog series…. items you should look for when choosing an HSA provider…
Unused Funds Being Returned to Company
Canada Revenue Agency is pretty clear on this issue – funds can NEVER revert back to the employer. The only time this can happen is when an HSA is used in a notional credit program combined with a flexible benefits plan. If you are working with a supplier and they allow you to take back unused funds from an employee if they quit, then you should re-evaluate your choice of supplier. Many of the new suppliers have taken the rules outlined in CRA bulletin IT-529 Flexible Employee Benefit Programs, and confused them with the guidelines outlined in IT-339R2 Meaning of Private Health Services Plan.
The guidelines outlined in the later bulletin, and to an extent those outlined in the original IT-85R2 Health and Welfare Trusts for Employees, are truly the best bulletins to follow regarding PHSPs and HWTs. The information in IT-529 is related to flexible benefit programs and provides an overview of how to account for benefits using a notional credit program. A notional credit program supports flexible benefits or cafeteria plans – common in many large corporations. Running a flexible benefits program using notional credits uses an HSA (in the form of a PHSP) in addition to a core plan offering varying levels of coverage for the employees to choose – traditionally as part of an annual election process.
In summary, funds can ONLY revert back to the employer if the program is part of a notional credit arrangement supporting a flexible benefits program. They belong to the employee! If you have a Private Health Services Plan or Health and Welfare Trust where the supplier allows you to take back the money if an employee is terminated or leaves…..buyer beware!
The holidays may be over for many of us, but Private Health Services Plan (PHSP) season has just begun. Since PHSP contributions are declared on your annual personal taxes to Canada Revenue Agency, they are accounted for on an annual basis. The earlier in the year you start making contributions, the better off you are by year end.
For Example:
If you are a self-employed professional with a spouse or dependent over 18 years of age, the annual allowance for you to deposit into a PHSP would be 2 x $1500 or $3,000 in total. However, this is assuming that you started the plan in January. If you started the plan in July, you would only be allowed to claim for 6 months worth of contributions, or half of the $3,000 you deposited into the PHSP. You could still deposit the $3,000, but would only receive the tax relief of 6 months worth of access.
If you are an unincorporated sole-proprietor in Canada considering the idea of opening a Private Health Services Plan in 2008, now is the time to do so.
HSA Information for Canadians 